If Costs Determine Price Why Do E-Books Cost More?

Jun 29, 2016

The traditional cost-plus approach to pricing dictates that price is a function of cost. So why are e-books (no printing, binding. etc.) more expensive?

If you are an avid reader that has even partially transitioned to ebooks you have likely been disappointed with their relatively high cost. Since ebooks clearly cost less to deliver to the consumer (no typesetting, no printing, no binding, no shipping, no returns of unsold copies, etc.), and since price is supposed to be a function of cost... shouldn't ebooks be much less expensive than their printed equivalents?

If the booksellers used a traditional cost-plus formula then yes, ebooks should be cheaper because the associated costs are lower. But the simple truth is that costs no longer matter. Prices are based on what the consumer is willing to pay, not what the product costs to manufacture and deliver.

How much cheaper are ebooks to produce and deliver?

It's hard to know for sure because publishers and retailers do not fully disclose their costs, and what information they do release is likely biased to support their pricing. It's interesting to note that years ago, before ebooks, when booksellers were trying to justify the high cost of their product they were quick to point out high production costs. Now that they are more eager to explain why there is such little (if any) saving with ebooks they insist that production is only a small part of the overall cost.

...they’ve underestimated the costs of shipping and warehousing books, and the tremendous cost of accepting returns (for full credit) of unsold books by bookstores — sometimes paying for return shipping, sometimes having the books simply destroyed...

The consensus seems to be that it costs $2-$4 to print hardcovers and $1-$2 to print paperbacks in high volume. This is probably lower than most readers would expect, and most articles on the subject follow along, suggesting that ebooks aren't discounted more because the small savings on printing don't give them the opportunity.

OK... but then how do you explain that ebooks cost more than the paperback version of the same title? No matter how small the cost of printing might be it's still more than the cost of delivery an ebook.

No matter what that paperback costs more than the ebook version, but it sells for more than a dollar more. Why?

While it is cheaper to provide an ebook costs don't matter....

Lower costs only equal lower prices if the seller uses a cost-plus formula in which price is a function of cost. Smart sellers have realized that it is much more profitable to price according to the way customers value their product and what they are willing to pay for it. Their costs have no effect on that. There is no longer a correlation between cost and price because there is no correlation between cost and what the consumer is willing to pay.

...what you're really paying for when you buy a book is something different. You are buying the "text itself". And why is that so expensive? Because the publisher will, in many cases, have paid the author a considerable sum for the right to sell it.

The one thing that is common to all versions is the content. This is the primary source of value and, since it's common to all versions, the price between versions won't vary all that much.

But the price will vary depending on secondary attributes like the type of binding, method of delivery, etc.

The hardcover is the premium (most expensive) version of the product. It appeals to people who don't just want the content, they want it in a specific format, one that will look good sitting on their bookshelf. They are willing to pay extra for that.

Next come the paperback and ebook versions. The paperback certainly costs more to print, bind and deliver.... but it still sells for less than the ebook that costs nothing for production or delivery.

So the seller clearly isn't basing the price on their costs – they are not using the traditional cost-plus formula. Instead they are pricing based on how consumers value other secondary attributes.

Let's compare the attributes of those different versions. Both the paperback and the ebook appeal to people that are interested in the content and have much less interest in the way in which it is delivered.

Once you accept that, for someone who is interested only in the content, a physical book does not offer any additional value it becomes clear that the ebook has some real advantages over the paperback...

It can be downloaded and consumed immediately. Unless you want to incur additional (relatively substantial) shipping charges you will have to wait at least two days to get the paperback.

For ebook enthusiasts the electronic format is more convenient because it is synced between multiple devices and available at all times. They can read it on their tablet at night and pick it right up again on their phone during their commute to work the next morning.

There is no additional clutter. If you don't care about having the physical book not having to deal with a physical book becomes a plus.

The ebook offers additional value that the customer is willing to pay for... and the vendor is happy to charge accordingly. Their pricing has nothing to do with their costs and everything to do with what the customer is willing to pay.